Retail buyers have a poor grasp of closed-end investment companies. That creates opportunities for Florida money man Erik Herzfeld.
Behavioral economics, per Nobelist Richard Thaler: Investors’ decisions are warped by emotion and ignorance. Prices can get out of line.
Herzfeld’s clients, who have entrusted $750 million to his Miami Beach firm, do not own that Gabelli fund. They do own shares of Central Securities Corporation, a wallflower that trades at a 19% discount to net assets. Exuberance for this fund died down soon after it opened its doors in 1929, a few weeks before the Great Crash.
How can cheap funds like Central coexist with absurdly overpriced ones like Gabelli Utility Trust? You’d think traders would arbitrage away the discrepancies. Herzfeld’s explanation is that Wall Street’s heavyweights find the closed-end universe, with but $224 billion in assets, too small to accommodate their bets.
Erik's father, and firm founder, Thomas J. Herzfeld now spends more time yachting than searching for deep discount funds.In 1990 Thaler and two other academics descended on the firm in quest of thousands of data points. In effect, they were trying to answer the question: Are closed-end investors crazy, or what? The resulting work, a seminal paper in behavioral economics, credits the teenage Erik for research assistance.
The correction of 2022 widened discounts, making closed-ends look more tempting. But this is a treacherous field. Consider the many closed-end funds holding leveraged portfolios of municipal bonds. Now that overnight tax-exempt borrowings cost close to 6% while muni bonds yield 4% or 5%, the leverage is making shareholders poorer. Pimco NY Municipal Income III is no bargain, even at its recent 11% discount.
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